Gold occupies a special place in most investor’s hearts and especially so in Indian investor’s hearts. Gold as investment may be used as a hedge against inflation, deflation or currency devaluation. It has been observed that in times economic uncertainty investors flock to safer investment avenues with gold being one of them. The two biggest reasons for gold prices to remain firm or even trend upward is the weak US payroll data which indicates that recession may be looming in the world’s largest economy and the European Sovereign Crisis. Thus gold should be a part of ones portfolio.
Investors have various modes to invest in gold such as jewelry, coins, bars, exchange traded funds etc. Since most investors are well aware of investing in physical gold we shall concentrate on investing in gold in electronic form. There are certain disadvantages associated with investing in physical gold such as the investor would be responsible for ascertaining the purity of the gold which may not be possible for all investors. Also with physical gold one is plagued with the issues of logistics i.e. namely storing, moving, reselling and maybe even insuring the physical gold.
Investing through Exchange Traded Fund (ETF) eliminates all these problems. An ETF purchases a large amount of gold behalf of the investors and stores it. The ETF then issues shares in baskets with the core idea being that the value of the shares will increase with the price of gold. Thus If the price of gold goes up by 10%, then individual shares would increase in value by the same 10%.
In addition to ETF’s there have been a slew of gold fund launches in India in the recent past by reputed Asset Management Companies (AMC) that include Reliance, Kotak, SBI among others. The schemes launched by these funds are Fund of Funds (FOF) i.e. a mutual fund that invests in other mutual funds. The schemes launched by these AMC‘s invest in gold ETF’s. The disadvantage of investing through FOF is that investors incur double the charges as each mutual fund would charge its management fee. However the advantages far outnumber the disadvantages especially for the burgeoning Indian middle class.
The gold schemes launched by these AMC’s make it possible to invest in gold through systematic investment plan (SIP). Investors investing through SIP would benefit from rupee cost averaging. When one invests the same amount in a fund at regular intervals over time, one can buy more units of the when the NAV is lower that is when gold prices are subdued and buy lesser units when the price of gold is higher as the NAV would also be high. With gold prices hovering above `28,000 per 10 gm mark it’s virtually impossible for the middle class to invest in gold regularly making these funds very attractive. Another advantage of these gold funds is that one doesn’t need a demat account to invest with such funds as is the case with investing with ETF’s. Investing in gold SIP can fetch investors up to 20% p.a. for over a period of 10 years, according to the calculation based on the price rise that gold has witnessed so far. Thus if one wants to invest in gold one should look beyond the conventional method of investing in gold. Happy Investing!!
By Alok Basrur – Research Analyst – Concept Securities Pvt. Ltd.
